Why I don’t believe in Value Investing!

Why I don’t believe in Value Investing

I don’t believe in Value Investing and neither should you!

This is a very heated subject, yup, I DON’T believe in value investing nor apply its principles as the main factor to decide which stock I will buy and I will tell you why in this post, but if you want to cut to the chase, if you want to make money then you need to think outside the box. Fundamentals matter over valuations, companies with new products or making breakthroughs are more likely to be big winners and also to be traditionally “expensive”.

What is value investing?

Value Investing has it roots with Benjamin Graham (1894-1976, that’s a long time ago), he wrote two great books about value investing: “Security Analysis” and “The Intelligent Investor” (I read the latter, it has some nice anecdotes and is REALLY boring). The main idea with value investing is that one should buy stocks that are traded at prices that are below their intrinsic value. In other words, their current P/B (Price to Book) is low, around 1 and the P/E is low, in example, around 20.

This idea revolutionized the world because it was fresh and very smart, if you own a stock below its intrinsic value and the company goes bankrupt, then you will get in return more than what you paid for, so, if the company goes bankrupt, you make money and if the company does well, then you keep making money.

Why was value investing a game changer?

You need to place yourself in that day and age, its 1949 and computers are not that powerful, there’s no internet, the only way to get information about a company is by writing to them (phones were not available everywhere) or by reading newspapers. This means that news did not affect the Share Price immediately like it does today.

If you were an avid investor, you would have spent countless hours doing math for many stocks until you found the one that was trading at the right price (P/B and P/E) and if everything else looked good on the company, you would buy the stock because it was a steal. This is how Warren Buffett made his fortune and if you want to be like him, I’m really sorry but you were born 50 years too late to apply this.

Why I don’t believe anymore on value investing?

Welcome to the 21st century, we live in the Information Age! If you want to know anything, the only thing you have to do is google it. This also is true in the investing world, if you want to know what is the P/E or P/B of any company, you don’t have to dig through newspapers and do a ton of math, you just google it and that’s it!

Well, I have to give credit where credit is due, Bank of America was an excellent investment because the bank was almost destroyed after the 2008 collapse, but, also because Mr Warren Buffett himself rescued the bank and made the stock go ballistic. Read between the lines, neither you or I have $5 Billions to rescue an almost bankrupt bank and make the share price go up because of our name!

What would you have missed by avoiding “expensive” stocks

Amazon (AMZN), current P/E: 316: Warren Buffett would have had a heart attack if you attempted to suggest to him to buy this stock at a P/E of 316! Yes, Amazon is considered to be expensive, but Amazon is THE leader in online shopping, there’s no other direct competitor and they keep making innovations, new products, Kindle, Prime, you name it. Performance: 368% return on 5 years

Tesla (TSLA), current P/E: Negative (losing money): Who on their right mind would buy a stock who is losing money? No one right? The thing is, Tesla is the first to show the world that electric cars were no longer a dream and they own the electric cars market, and when nobody thought it was possible, they released electric trucks. They shook the car industry and changed it forever. Performance: 917% return on 5 years

Netflix (NFLX), current P/E: 215: Online movie and series streaming? but why? I have cable and I can rent movies if I wanted to, why would I have a Netflix account? Guess what, that crazy idea is killing the cable companies and is growing and growing more every day. Performance: 1400% return on 5 years

Facebook (FB), Year 2012 P/E: 2300: If you were crazy for buying Amazon at P/E 316 then you must be clinically insane to buy Facebook when it was at 2300. Social media, can you make money from it? Turns out yes, and a lot, especially if you are the leader at it! Performance: 492% return on 5 years

If you had this 4 stocks in your portfolio in equal parts, you would have had a 794% return on investment, which means, if you invested $1000 5 years ago and never contributed more money to it, you would have today $7,940, while if you had Warren Buffet portfolio, you would only have $1,860 or 4 times more money!

Don’t let anyone tell you that you can’t beat the market, everybody knew about those stocks during the past 5 years, they were “hidden” in plain sight.

Growth stocks, my kind of stocks!

Growth stocks are companies which earnings are expected to grow more than the average company. Lets rephrase this, Growth Stocks are Stock from companies that are expected to make more and more money every year, year after year. Yes, that’s the kind of stocks that will bring your portfolio to the next level!

Amazon, Netflix, Tesla and Facebook have the following in common: revenue increase quarter by quarter over 10%, their are the leaders on their industry, they don’t pay dividends, instead, they reinvest the profits to expand the company even more.

Another thing that Amazon, Netflix, Tesla and Facebook have in common is that they are Growth Stocks! and they are overvalued to a value investor, and why are this companies overvalued? Because this are money-makers and shareholders expect them to grow real fast, driving the share price up and up after each financial reports.

So let the disbelievers keep crying “Amazon is overvalued, you will lose all your money!” and reap the rewards of a 368% 5 year return on investment! Hey, when you are making 368% return you can easily take a 20% loss on your portfolio, but if you are only making 86% (I’m watching you value investor), then a 20% is a massive hit.

My take

Fortune favors the bold, investing is inherently risky, and this won’t change if you are a value/growth/index investor. When I buy stocks I buy them because this companies have great ideas, their revenues are constantly growing and they are taking the market by surprise, but also everyone is screaming “IS TOO EXPENSIVE!!!”.

It’s not up to me to argue with the market and tell Amazon: “Hey Amazon, you are overvalued, I want to buy you, please drop 80% your price so you are valued properly”, NO! I will buy it and ride the bull ride until is dry! and so far, the bull ride has lasted more than 5 years.

So you can yell “ITS EXPENSIVE”, or you can stop arguing with the stock market and take benefit from the amazing returns!

What are YOU going to do? Leave your comments below!

Quote of the day:

“The market can stay irrational longer than you can stay solvent.” – John Keynes

Hey there! I'm Derek Feher and I have a passion for teaching how to Invest in the Stock Market! If you feel overwhelmed or that you need to know EVERYTHING before putting a dollar on the stock market, then fear no more, you've reached the right place!

4 comments

I am a value investor and I started buying individual stocks in March 2000, just as people like yourself declared it to be an old, tired idea. Through the years I have moved more to index funds, but I have been inspired by Jeremy Siegel’s follow-up book, “The Future for Investors”, which has the subtitle, “Why the Tried and True Triumph Over the Bold and New”. Jeremy Siegel was able to use a lot of free labor (students!) to go back in time to see what happened to all those loser companies and what your portfolio would look like if you didn’t touch anything. Investing success can only be assessed over long periods of time. I’ll check back here in 10 or 20 years to see what you think 🙂

I’m not really in that much disagreement with your general philosophy though. Fortune does favor the bold. But in this case, could it be that the bold are willing to invest in the “losers”?!!

I’ll start with a quote from Peter Lynch “Never expect to winn all the times, if 6 out of 10 stocks that you own are good, you’re doing great”. This is the basis of my investing philosophy. I will definitely pick some losers along the way, but overall, my winners will outperform and pickup the slack from my losers.

Index Investing is by far one of the best strategies out there, matter of fact, I hold one portfolio dedicated exclusively to index investing. So yeah, I do believe it on it and also encourage every investor to hold at least a tiny portion of their portfolio to it.

When selecting my stocks I do a deep research, I check their story, financials, opinions and chart trend. I don’t let classic ratios like P/E ratio fully dictate if I should or shouldn’t buy a stock. If the PE ratio is lets say, 100, but the company year to year increases their sales/revenue by over 25%, in a constant way, I would owned the stock until they ran out of fuel (slow growth). This can take years for it to happen.

Last but not least, I don’t trade stocks anymore, anything that I own, I own it for +5 years, which means, I truly believe in Buy and Hold, but not “Buy and hold till the ends of time” ;).

And yeah, fortune does favor the bold indeed, but that doesn’t mean that we have to take risks just for the sake of it :D.

PS: After reading “A random Walk Down Wall Street” (My favorite book by far), I have a hard time following financial opinions from university teachers who don’t invest. Any idea that you have on the stock market will look great when you backtest it, but that doesn’t means that it will work.

Hi Derek, nice post but the truth is that I disagree.
Value Investors dosnt think overvalued comapanies are a bad bet, but what we think is that its extremly difficult to hit this winners straight for a long period of time.
Our philosophy is to focus on risk, by avoiding the loosers and let the winners take care of themselves.

Hey Luis! Thank you so much for your comment. We share the same concept about value investing. I do believe that value investing is a great, tried and true strategy that has worked like a charm for Ben Graham and Warren Buffett (Before he met Philip Fisher) among many many other successful investors!

I do believe that I have to revise a little bit this post to show the true philosophy of value investing

Your comment shows me another perspective of what value investing is an